Can I get a small business loan with an LLC?

Yes, a Limited Liability Company (LLC) can absolutely get a small business loan. In fact, having a formal business structure like an LLC is often viewed favorably by lenders compared to a sole proprietorship because it demonstrates a clear separation between personal and business finances.

The critical point for new LLCs, however, is that the business entity itself has no financial history. Lenders mitigate this risk by heavily scrutinizing the personal financial health of the LLC's owner(s). For most startups and young businesses, the owner's personal credit score and financial history are the primary factors in the lending decision.

Lenders will almost always require a personal guarantee from the owner(s) of a new LLC. This is a legally binding agreement that makes you personally responsible for repaying the loan if the business defaults. The LLC's liability shield protects your personal assets from business lawsuits, but it does not protect you from a loan you have personally guaranteed.

Therefore, the question isn't just if an LLC can get a loan, but what lenders require from you, the owner, to approve the application. The primary factors are:

• Personal Credit Score: Your FICO or VantageScore is a proxy for your financial responsibility.
• Time in Business: Most lenders have a minimum operational history requirement.
• Annual Revenue: Demonstrates the business's ability to generate cash flow to repay debt.
• Collateral: Assets (business or personal) that can secure the loan.

Lenders use a combination of personal credit, business metrics, and revenue to assess an LLC's loan application. For new businesses without a long track record, the owner's personal credit score is paramount. Below is a breakdown of what to expect based on your personal credit profile.

Personal Credit Score: The Deciding Factor for New LLCs

According to the Federal Reserve's Small Business Credit Survey, the top reason for credit denial is insufficient credit history, followed by low credit scores. For young firms, this underscores the reliance on the owner's personal credit profile. You can check your score through various credit monitoring services to understand your standing before applying.

For nearly all small business loans to new LLCs, a personal guarantee is non-negotiable. It's important to understand what this means for your personal finances.

• What it is: A personal guarantee is a contractual clause where you, the business owner, agree to be personally liable for the business's debt. If the LLC fails to make payments, the lender can pursue your personal assets—such as your home, car, or savings—to satisfy the debt.
• Why it's required: An LLC is a separate legal entity, which normally protects your personal assets. However, a new LLC has no credit history or proven track record of profitability. The personal guarantee bypasses the liability shield for this specific debt, giving the lender a way to recover their funds if the business fails.

There are two main types of personal guarantees:

1. Unlimited Personal Guarantee: This is the most common type. You are responsible for the entire loan amount, including any interest and fees, regardless of how many partners there are. This means that even if you are a minority owner in the LLC, a lender could seek repayment for the full debt from your personal assets.

2. Limited Personal Guarantee: Less common for new businesses. Your liability is capped at a certain amount or percentage. For example, in a partnership, each partner might guarantee a portion of the loan proportional to their ownership stake.

Signing a personal guarantee means the business loan can impact your personal credit score. If the business makes late payments or defaults, it will likely be reported on your personal credit report, potentially lowering your score significantly.

Traditional bank loans are often inaccessible for LLCs with less than two years of history and significant revenue. Fortunately, several other financing options cater specifically to newer businesses.

Common Loan Types for LLCs Under 2 Years Old

For businesses struggling to meet even these requirements, personal loans for business use can be an alternative. These are based solely on your personal credit and income, not your business's performance. However, they may have smaller loan amounts and consumer-level interest rates.

Being prepared with the right documentation can significantly speed up the loan application process. Lenders need to verify both your personal identity and the legitimacy and financial health of your LLC.

Core Documents for an LLC Loan Application

• Business Formation Documents:

- Articles of Organization: The legal document filed with the state to create your LLC.

- Operating Agreement: Outlines the LLC's ownership structure and operational rules.

- Employer Identification Number (EIN): Your business's federal tax ID number from the IRS.

• Financial Documents:

- Business Bank Statements: Typically for several recent months to show revenue and cash flow.

- Business Plan: Crucial for startups. It should include financial projections, market analysis, and your strategy for using the loan funds.

- Personal Financial Statement: A summary of your personal assets and liabilities.

- Personal and Business Tax Returns: Usually the last one or two years.

• Personal Information:

- Government-Issued ID: For all significant owners (often defined as those with a substantial ownership stake).

- Social Security Number: For the personal credit check on all guarantors.

Having a dedicated business bank account is essential. Commingling personal and business funds is a major red flag for lenders and can jeopardize the liability protection your LLC provides. It also makes it difficult to prove your business's revenue and profitability. If your business credit is thin, consider services that offer rent reporting to add positive payment history to your personal credit file, which can help your application.

While your personal credit is key at the start, building a strong business credit profile is the long-term goal. A good business credit score can eventually help your LLC qualify for loans without a personal guarantee and on better terms.

Steps to Establish and Build LLC Credit

1. Incorporate as an LLC: You've already done this. This act separates your business and personal identities.

2. Get an Employer Identification Number (EIN): An EIN is like a Social Security number for your business. It's required for opening a business bank account and filing taxes.

3. Open a Business Bank Account: Use this account for all business income and expenses. This creates a clear financial record.

4. Obtain a D-U-N-S Number: This is a unique nine-digit identifier for businesses from Dun & Bradstreet, a major business credit bureau. It's free to get and is often required by lenders and suppliers to view your business credit file.

5. Open Trade Lines with Suppliers: Apply for credit with vendors and suppliers who report payments to business credit bureaus (e.g., Dun & Bradstreet, Experian Business, Equifax Business). These are often called "vendor credit" or "net-30 accounts."

6. Get a Business Credit Card: Use it for small purchases and pay the balance in full each month. This is one of the fastest ways to build a positive business credit history.

7. Pay All Bills On Time or Early: Payment history is the single most important factor in both personal and business credit scores.

Building business credit is a gradual process. It can take several months to a year of consistent, positive payment history to establish a solid score. This effort positions your LLC for better financing options in the future, including some of the best small business loans available.